Background

Pursuant to request by the Hungarian government, the EC has commenced a study on the feasibility of creating a fund to cover damages caused by major industrial accidents. The study is being conducted by Bio Intelligence Services (BioIS). Members may recall that BioIS conducted the EC’s previous study on ELD implementation and effectiveness, which was aimed at collecting stakeholder feedback for the EC’s October 2010 report on the same topic. The aim is to examine whether an EU-wide fund or resource pooling scheme would be feasible for addressing traditional and environmental damage resulting from industrial pollution. The development of this fund would depend on the potential involvement of the industrial operators as well as key players in the financial sector. BioIS created a questionnaire to examine the above issue and has requested a response by FERMA by its deadline of 21 November 2012. BioIS also held a related workshop on 7 November 2012.

Recent Developments – EC Workshop

Multiple stakeholders attended the EC’s workshop yesterday, including participants from the mining and oil sectors as well as insurance. Also in attendance were Ambassador Olivér Várhelyi, Deputy Permanent Representative of Hungary to the EU, and MEP Erik Bánki advisers Gábor Vásárhelyi and Judit Varga. DG Environment led the workshop, though DG Energy also attended and provided a brief presentation.

FERMA presented at this workshop during the stakeholder portion, in addition to INSURANCE EUROPE. All presentations from the workshop are uploaded on to BioIS’s website (http://eldfund.biois.com/).

Hungarian proposal

Ambassador Várhelyi discussed the proposal for an EU-wide fund to cover environmental and traditional damages arising from industrial accidents. The Hungarian government raised this proposal to the EU shortly after the October 2010 industrial accident at an aluminium factory in Kolontár, Hungary, which resulted in a wave of toxic red mud that caused significant environmental damage and severe chemical burn injuries. The accident also resulted in extensive damage to surrounding properties.

Ambassador Várhelyi stressed that a fund would not only help to ensure that both environmental and traditional damages get covered, but that it would help the “solvency problems” of companies by “creating the possibility for the company to continue its safe operations”. The proposed threshold for the fund is 100M EUR, which the Ambassador claimed is the ceiling at which companies have trouble finding cover from the insurance market (due to either the cover being too expensive or the risk being uninsurable). The fund will be capitalised by an annual levy placed on industry operators. For any money that might be left over at the end of the year, the Ambassador stated that these extra monies could be spent on safety improvements to the activities of the contributing operators.

The Hungarian government raised this proposal during the EU Council meeting on 14 December 2011 (Further steps to establish a common European industrial disaster risk-sharing facility), after which DG Environment of the EC agreed to analyse the proposal further and provide feedback on its feasibility. DGs Humanitarian Aid, Regional Policy and Energy have also been involved in discussions concerning the proposal.

Damages envisioned to be covered by the fund. The Hungarian government has modified its proposal since 2010 in order to address both environmental and traditional damages, as the proposal was initially targeted at environmental accidents. While environmental damages primarily refer to those covered by the ELD, traditional damage is intended to cover personal injury, property damage and/or economic losses. The reason cited for this was that Hungarian businesses suffered operational losses following the 2010 toxic red mud accident due to the need to cease their activities.

The workshop also touched upon damages resulting from natural catastrophes. While the current Hungarian proposal does not encompass this area, the Hungarian MEP advisers suggested that natural catastrophes could be considered for the fund in the future.

FERMA presentation

During its presentation, FERMA mainly noted its recent activities with the ELD, including participation in Insurance Europe’s Environmental Liability Taskforce.

FERMA only briefly presented on its “preliminary position”, which expressed disagreement with the establishment of fund on the basis that the insurance sector is able to provide adequate cover for both

environmental and traditional damage claims. FERMA noted that solutions provided by the insurance industry are preferable to any fund scheme and that funds tend to be expensive, particularly due to transaction costs

and a failure to take into account prevention efforts made by an insured operator. FERMA also stated that “special solutions may be needed for SMEs or particular types of operations”, such as offshore oil or nuclear. When asked about this statement by DG Energy, FERMA clarified that sectors have separate ways to cover risks and may look into solutions on their own (eg OPOL).

Call for prevention

Other stakeholders, including representatives from the mining sector and from FERMA, stressed that prevention of the disasters is key and should still remain a primary focus of the EU. Insurance Europe also integrated this message into its presentation.

Question on insurance cover

The Hungarian MEP advisers questioned whether it was possible to calculate an “average” of the level of insurance cover available for certain risks (both environmental and traditional). It was discussed that an average could likely not be obtained due to competition reasons and the difficulty in collecting such data. It was also discussed that many companies have a self-insured retention (SIR) and will seek out excess insurance cover for very severe risks. It was explained that the higher a self-insured operator’s limit is, the less expensive the cover will be, as the likelihood of triggering the excess insurance will be lower.

EC conclusion

DG Environment acknowledged that there are different sectors that would be affected by the fund proposal and that not all these sectors have the same risk. DG Environment further provided that operators within the same sector can also be faced with different risks (due to their size or risk management practices). It was stressed that this issue will need to be addressed with respect to whether such a fund can feasibly cover all risks (environmental and traditional) of all sectors. In addition to the above, DG Energy provided that it was still continuing its study on offshore oil safety with respect to financial security issues, but that its focus was now on introducing mechanisms similar to OPOL in the various EU regions (eg Mediterranean, Black Sea, Baltic Sea, etc). Thus, its current aim is not to introduce a single, EU-wide financial security solution for all offshore oil operations.

Insurance Europe contributions

The Insurance Europe Secretariat highlighted the following points during the discussions held at the workshop.

There exist different insurance sectors for environmental and “traditional” (ie general) liabilities, as well as different risk exposures, coverage needs and demand for cover.

The property insurance market is very large in comparison to environmental liability and maintains different solutions for different regions.

Property insurers have entirely different expertise than liability insurers and must manage and cover risks with different methods and risk assessment tools.

Some “traditional” damages (eg property, economic loss) can be estimated more quickly than ,environmental damages due to their short-term nature.

A fund contradicts the “polluter pays” principle and risks defeating the purpose of the ELD.

A fund will need to satisfy the same conditions / pre-requisites that are required for insurance (eg build sufficient capital, ability to pay out claims quickly).

A fund can interfere with the growth in new insurance products, as demand for cover may be lower.

Key questions:

How would fund manage the cover of liabilities faster than the insurance market?

How will political decisions be avoided (eg favouritism for a particular country)?

What is the end goal of the feasibility study?

Who would be responsible for implementation of the fund / collecting operator contributions?

What about SMEs that cannot afford both insurance and a fund?

Later discussions revealed positive feedback to the Insurance Europe presentation. Both the EC and the Hungarian MEP advisers acknowledged that the presentation raised several questions that will need to be addressed during the fund study.